ESG investments move a step closer to strict definitions and certification

As the ESG investing space gains size and appeal, the parameters and definitions continue to expand and in some instances become vague, which opens the door for potential abuse of the ESG label.

With that in mind, the latest effort to help define and monitor investments being presented as adhering to environmental, social and governance causes comes via a partnership between K2 Integrity, RepRisk and a host of other fintech firms.

"The need to validate and quantify ESG initiatives has never been greater," said Andrew Rabinowitz, co-chief executive of K2 Integrity.

"We started our ESG practice and developed this new offering to meet increased demand for transparency from stakeholders, regulators and the investment community to address important issues such as diversity, equity and inclusion, sustainability and strong governance, and combat accusations of greenwashing,” Rabinowitz added. “These partnerships with RepRisk, Novata, the Maples Group and other leading ESG experts will allow us to further advance our ESG certification program and help managers verify to the marketplace, limited partners and regulators that their offerings are aligned with what is being advertised."

The expanding list of fintech partnerships are designed to bolster the ESG fund certification that K2 introduced in August.

The effort to somehow specifically define and track everything that encompasses ESG investing is no small undertaking, but it's extremely necessary to help maintain the integrity of the ESG space while also protecting investors from products that might be ESG in name only.

“Investors need to understand whether ESG funds are actually walking the talk, or just applying a coat of green varnish to boost their curb appeal,” said Ben Johnson, director of global ETF research at Morningstar.

“Third-party assessment and validation of funds’ ESG bona fides is more important than ever, and Morningstar and Sustainalytics are leading the way in forging this new lens to empower investors as they vet ESG funds,” Johnson said.

Alexandra Mihailescu Cichon, executive vice president at RepRisk, said K2 is the driving force behind the certification endeavor and RepRisk’s role is to "systematically identify and assess ESG risk related to companies inside the portfolios.”

“We’re looking at the business conduct of the company,” she said. “Our data serves as a reality check on whether the processes are being implemented.”

As Cichon explained it, the fund certification process starts with a questionnaire devised by K2. The second part of the process involves a deep dive into the fund and the fund company.

The third step is where RepRisk becomes involved, Cichon said.

“They look at our metrics and our data and match that with the research on the fund and fund company,” she said. “We’re feeding them the data on the underlying companies.”

The partnership with RepRisk will provide K2 Integrity with access to RepRisk's independent ESG risk data pulled from over 100,000 sources in 23 languages, allowing it to avoid disclosures made by the companies themselves to refine the new certification solution's analysis process.

The partnership with Novata will provide the firm with access to Novata's proprietary data collection and management software to streamline these processes.

Over the past year, K2 Integrity and the Maples Group have partnered with investment managers and academics from such institutions as Cornell, Carnegie Mellon, Columbia and University College-London to develop an independent ESG assessment certification for fund managers and funds. Together, the partnerships are designed to allow K2 Integrity to customize the solution to offer different certification types that align with regional ESG regulations.